L18: Taxes Affecting Real Estate

Question 1

“Ad Valorem” (property taxes) + Assessed Value

Answer 1

Ad Valorem = taxes are based on the assessed value of the property

Assessed value = value based on the value of other properties in the area + improvements made since purchasing. Done yearly by the county

Question 2

To which level is property tax in FL taxed on?

Answer 2

Local level only: cities, counties, school boards

Question 3

“In Arrears” (property tax)

Answer 3

Property tax is paid at the end of the year. Due from November 1 to April 1

Question 4

Property tax exemptions (3)

Answer 4

1) immune properties (city, county, state & federal properties that don’t get assessed)
2) exempt properties (churches & nonprofits; subject but don’t have to pay)
3) partially exempt properties (subject but partially exempt)

Question 5

Partially Exempt Properties (1/8)

Property Tax Exemption

Answer 5

1) Homestead Exemption (req: FL resident, hold title & permanent residency)
Exemption scale (value):
*0-50k, $25k exemption
*50k-75k, $25k exemption + exemption on city & county tax (dollar for dollar above $50k)
*75k+, $25k exemption + $25k exemption on city & county tax

Question 6

Partially Exempt Properties (2to8/8)

Property Tax Exemption

Answer 6

2) widowed and not remarried, $500
3) blind or totally permanently disabled, $500
4) non-veteran quadriplegic or disabled first responder, 100%
5) veteran, 10%
6) disabled, $5k
7) service-connected totally disabled veteran, 100%
8) surviving spouse of veteran who died on duty, 100%

Question 7

Taxable value formula

Answer 7

Taxable value = assessed value - Homestead exemptions

Question 8

Save our homes amendment

property tax

Answer 8

SOH limits property tax increase to 3% annually

SOH is portable within 2 years & up to $500k

Question 9

Tax Base

Answer 9

The total taxable value available in a specific area

Tax base = total assessed value - total exemption

Question 10

Mill

Answer 10

1/1000 of a dollar, $0.001

Used to express tax rate in FL

Question 11

Annual Property Taxes Due (formula) + property tax savings

Answer 11

Annual property taxes due = taxable value x tax rate (1/1000)

Property tax savings = total exemptions x tax rate

Question 12

Special Assessment

Answer 12

• when additional taxes are levied on homeowners in a neighborhood or area to pay for improvements that benefit people living there
• can be voluntary or involuntary

Special Assessment = total special assessment cost x homeowner’s shares

Question 13

Street Paving Assessment

Answer 13

Street Paving Assessment = ((front ft x $ per linear foot) x owner %)/2

Question 14

Federal Tax Incentives for Homeowners (deductions, tot 7)

Answer 14

1) Mortgage Interest Tax Reduction (deduction limit $750k jointly, 375k single)
2) Home equity loan interest deduction (loan for home improvements, interest paid deduction up to 750k jointly, 375k single)
3) property tax deduction (10k between state, city & property taxes)
4) IRA withdrawals (people with no purchase in 2 years, can withdraw up to 10k from their individual retirement account for down payment on residence)
5) Point deduction (one discount point = 1% total value of loan, interest that is prepaid & can be tax deductible in the year they are paid)
6) mortgage pre-payment penalty deduction
7) exclusion from capital gains (money made from sale of property 500k married, 250k single)

Question 15

Capital gain Formula

from the sale of property

Answer 15

Capital gain = realized gain - adjusted basis

Realized gain: sales price -selling costs
Adjusted basis: basis + cost of capital improvement + qualified selling costs

Question 16

Capital improvement (to a property)

Answer 16

Upgrade or improvement to a property that falls outside the scope of normal repair and maintenance

Question 17

Property’s holding period & capital gain Taxation

Answer 17

Holding period = how long property is held (owned) before being sold

Holding period < 1 year = short term capital gain (taxed as normal income)
Holding period > 1 year = long term capital gain (taxed at 0%, 15%, 20%, 25% or 28% + 3.8% net investment income tax, if applicable)

Question 18

Foreign Investment in Real Estate Property Tax Act of 1980 (FIRPTA)

Answer 18

FIRPTA = regulates the purchase of RE property in the US from foreign sellers

Only applies to properties $300k +
Buyer must withhold 15% of sales price for taxes

Question 19

Deductibles for taxable income on investment properties (for IRS)

Answer 19

• certain operating expenses (ie. running & maintaining property)
• property taxes (considered fixed operating expenses)
• replacement expenses paid during tax year

Question 20

Debt service

Answer 20

Amount of money needed for a specific time period in order to cover the payment of principal & interest portions on a loan

Question 21

Depreciation of investment properties (requirement & cause)

Answer 21

Requirements:

• must be owned by the taxpayer
• must be used in taxpayer’s business or income producing activity
• must have determinable useful life
• must be expected to last more than 1 year

Causes:

• physical deterioration
• functional obsolesce (outdated)
• external obsolesce (loss of value due to external factors)

Question 22

Depreciation calculation & property’s useful life

Answer 22

Annual IRS DEPRECIATION deduction = depreciation basis/useful life

• Depreciation basis = purchase price + acquisition costs + renovation - land value
• Useful life:
  residential, 27.5 years
  commercial, 39 years

Question 23

Improvement vs. repairs in investment property depreciation

Answer 23

Improvements = increase the basis, so it must be depreciated separately if done after property has been put in service. If done prior, basis needs adjustment
NB: adjusted bases = basis + cost of improvements + qualifying and closing costs - realize depreciation

Repairs = do not increase the basis and can be deducted in the year they were made

Question 24

1031 Exchange (a.k.a. tax-deferred exchange)

Answer 24

Allows for a tax deferment when a property is exchanged for a similar one (investment property only)

Requirements:
– no property must be identified within 45 days
– new closing within 180 days from sale of original
– properties must be “like kind“
– cash has to go through qualified intermediate
– 2 year limit per exchange

Exchange can be “booted“

Question 25

Boot

Answer 25

Cash or property is added to an exchange to make the value of the traded goods equal.

Common types of boot:

• cash boot
• mortgage boot
• personal property boot

Question 26

Stamp Tax in FL

Answer 26

Stamp tax on new deed = .007
Stamp tax on mortgage = .0035
Stamp tax on new mortgage = .002